Next year

There is an interesting mix of opinions on the outlook for next year.

The sell side is firmly bearish. Goldman Sachs had a piece out recently iterating their bearishness for 2023, as did Macquarie, citing recessionary risks. The below is for the S&P 500, although the Macquarie comments were for Australia.

The fund managers are more upbeat, noting the below is for the world at large.

We think it is simply impossible to tell for a time frame as short as a year, but more generally we take the view that there are good reasons to be bullish (starting valuations) and good reasons to be bearish (monetary policy tightening).

Should we get to Thursday of this week (a big day of global central bank activity, with hikes expected from the Fed, the BoE, the EU, and in addition a few CPI prints), and markets encounter either more-hawkish-than-expected central bank outcomes, or more-persistent-than-expected inflation outcomes, we can expect shares to fall.

We don’t have a strong view on how this will go, but we will happily add to risk if markets sell-off aggressively, and conversely, sell into strength if benign outcomes send the market into a year’s end “Santa-rally”.

Perhaps to round it off.

We’ve got the oil market suggesting that global growth has weakened significantly. Oil has gone from $130 (too high) to ~$72, despite some decent supply side support (for example, OPEC+ cutting supply, however modestly). Incidentally, the oil stocks themselves haven’t reacted (oil is largely flat year on year, whereas the oil stocks are up and up strongly, creating quite a wedge between them).

Anyway, it’s the first part of the above paragraph that’s relevant at the portfolio level.

The housing market, like the oil market, also says “slow down the hikes, pivot now!”. It is, according to RH (the US home furniture company) in effective freefall.

However, the job market data continues to suggest a need to hike. 263K new jobs in the US, and annualised wages growth at c6%. Even if you assume a full 1% percent for productivity gains, unless firms are happy to drop margins, there is no way to get inflation back to 2-3%, if wages don’t weaken, which usually requires unemployment to rise.

So, low conviction, hence our efforts yesterday on Ausbiz to stress the importance of diversification.

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